Economic News Affect Stock Prices

The government and some private organizations regularly issue statistics on the performance of the nation’s economy. These data releases can lead to adjustments in the price of financial assets as market participants reassess their views of the economy’s current condition and its likely future evolution.

It is quite natural that the nature and extent of the market response will vary with the announcement. Small unexpected changes in economic indicators may lead to rocket change in asset prices, whereas in many cases shifts in other indicators however large or surprising, are quickly shrugged off by the markets. In case of Indian market it was seen that the government announcement of FDI in retail created a large impact on the prices of the stocks of the companies which are mainly operating in the retail sector or are in some manner linked with retail sector.

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What is News & how it moves the Markets

The speculation in the market which is caused by the news released in the market is one of the major causes of such price changes. By “news,” it is meant about the surprise element, or the difference between the actual values announced for an indicator and market participants’ prior expectation of what that value would be.

It is important to note that any news of unexpected economic strength or of unexpected inflationary pressure lead to higher interest rate which will impact the market. A stronger economy will drive prices higher, prompting the central bank to pursue tighter monetary policy. It is undoubtedly true that the investors cannot be certain about the timing and strength of central bank’s reaction to the news. This uncertainty results in fluctuations in the market. If the central bank’s reaction is muted or delayed, long-term rates may respond more than short term rates. It is seen that in general circumstances, the interest rates behaves normally as per the investors’ expectations, rising in response to news of faster growth or higher inflation.

Affects on Market

Some economic indicators affect the bond yields and exchange rates, which in turn result in affecting the stock prices to a great extent.

Due to the presence of different kind of investors in the market, the economic indicators have always shown an uneven effect across asset classes. Unexpected changes in the data have impacted the interest rate which in turn impacts the exchange rates and finally shows the impact on equity prices.

By now it is pretty clear that the impact of economic news on stock prices is harder to predict. The statistics of companies’ annual performance, performance of industry and economy growing faster than previously thought usually creates expectations of higher corporate earnings and dividends. These expectations boost the stock prices which are also in tandem with the general theory of companies’ stock price which should match the expected stream of future dividends from the stock discounted to their present value.

Moving to the consequences of exchange rates, historically we find that the economic news for exchange rates is also ambiguous. News of higher domestic inflation may lead to a weaker currency whereas in the short term, such news may cause the currency to appreciate provided investors expect central bank to respond to higher inflation by raising short term rate.

Also Read about Treacherous Indian Stock Market on GWI.

Conclusion

Thus to sum up we can say that the statistics like GDP growth rate, advance release, IIP report, inflation, currency etc. affect the asset prices in a very significant and systematic fashion. One of the strongest impacts of the announcements is seen on interest rates, which are linked to the stock prices. Thus there is no certain basis to analyze the impact of economic news on financial markets as the volatility is something which cannot be judged with certainty.